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TPNW virtual panel session – Thurs 18th February 2021
Some 40 members and guests joined the panel discussion on “CDC- White hot or white elephant?” Our three panellists Adrian Boulding (Now Pensions), Danny Wilding (Barnett Waddingham) and John Quinlivan (independent consultant) all had slightly different perspectives on this very hot topic which led to a very informative and interesting discussion.
Adrian described the current state of play following the previous week’s Royal Assent to the Pension Schemes Act 2021 which brought into being CDCs – described as “collective money purchase schemes” in the Act. He pointed out that a CDC has to be an occupational scheme currently for a single employer or connected employers. He described the TPR Authorisation Regime modelled on that applicable to Mastertrusts and drew attention to the three tier test of viability of the benefit structure involving the scheme trustees, actuarial certificate and the TPR check.
The panellists looked at the accumulation phase and decumulation aspects separately. Looking at the accumulation phase they drew attention to the challenges posed by the structure in coping with different generations of members who might also have very different views on investment strategy particularly younger members who might have much stronger interest in ESG investments. Under a CDC scheme the investment policy would be determined by the trustees.
The potential costs of CDC schemes with the layers of regulation similar to DB schemes was highlighted as a potential disadvantage and Danny Wilding thought that CDC was likely to be suitable only for employers willing to contribute at least 20% – most DC employer contribution rates are currently well below this level. There was broad agreement that at least initially CDC is likely to appeal to public sector and large private sector employers.
The different possible benefit design were highlighted – for example a target benefits structure which is closer to DB and a pooled account which is closer to DC. Danny said that the main potential advantages are higher long term investment returns if you don’t need to match “target” benefits and lower costs from pooled accounts but pointed out that CDC can’t magically turn inadequate contributions into adequate benefits!
John drew attention to some overseas experience referring to the US, Australia and the Netherlands – none of which was overwhelmingly positive. In looking at the decumulation aspects John came up with the term “Annuicide” and highlighted the benefits of intergenerational mortality pooling. Danny also felt that the pooled decumulation is potentially efficient for a target benefit scheme but that it needed a large population for the risk pooling to be effective.
There was some discussion of the Willis Towers Watson modelling which had drawn headlines suggesting that CDC pensions could be 70% higher than DC and 40% more than DB. All the panellists felt that these numbers were overstated and were a consequence of the assumptions made some of which could be seriously challenged. The issue of the loss of short term life cover (the return of fund to dependants) for those just retired could be seen as a disadvantage of CDC although it was confirmed that individuals would be able to transfer out of a CDC at or close to retirement if they wanted to take advantage of pension freedoms.
There were differing views on whether CDC has “come to the party too late” given that many DB schemes have now converted to DC in many cases reducing the employer’s costs and liabilities. It was hard to see switching back to CDC being attractive to many employers. Adrian felt that the Royal Mail scheme which was likely to be the first CDC scheme was unlikely to be launched until 2023 at the earliest and that it could be 2025 before we saw many CDC schemes.
It was a lively discussion with lots of questions but by the end the jury was still out on whether CDC was white hot or a white elephant.